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MANAGEMENT ACCOUNTING
UNIT-I
PART-A
1. What is management accounting?
Management accounting provides information to the management to use it as a
base for decision making. The emphasis of management accounting is to redesign
accounting in a manner which is helpful to the management in framing the policies
and control of their execution.
2. Define management accounting.
Batty’s definition describes” Management Accounting as a combination of various
accounting systems and techniques which are designed to meet the needs of the
management.
3. Define Accounting.
Eric L.Kohler defines: the procedure of analysis, classification and recording
transactions in accordance with a preconceived plan for the benefit of (a)
providing a means by which an enterprise can be conducted in an orderly fashion
(b) establishing a basis for reporting the financial condition of an enterprise and
the results of its operations”
PART-B
1.What are the characteristics of management accounting?
i) Providing financial information:
The main emphasis of management accounting is to provide financial information
to management.
ii)Cause and effect analysis:
Financial accounting confines itself to presentation of P& L account and balance
sheet. Management accounting analyses the cause and effect of the facts and
figures thereon
iii) Use of special techniques and concepts:
Management accounting employs special techniques like standard costing,
budgetary control, marginal costing, fund flow responsibility accounting etc.
iv) Decision making:
Main objective of management accounting is to provide relevant information to
management to take various important decisions.
v) No fixed conventions:
Financial accounting has various established principles and rules preparing the
financial accounts. Management accounting has no such fixed rules.
2.What is the scope of Management accounting?
(i) Financial accounting:
Financial accounting deals with financial aspects by preparation of profit and loss
account and balance sheet. Management accounting rearranges and uses the
financial statements.
ii) Cost accounting: cost accounting is an essential part of management
accounting. Cost accounting through its various techniques reveals efficiency of
various divisions.
iii) Budgeting and forecasting: Budgeting is setting targets by estimating
expenditure and revenue for a given period. Targets are fixed for various
departments and responsibility is pinpointed for achieving the targets.
iv) Inventory control: This includes planning, coordinating and controlling
inventory from the time of acquisition to the stage of disposal.
v) Statistical Analysis: In order to make the information more useful statistical tool
and applied. These tools include charts, graphs, diagrams, index numbers etc.
3. Objectives and functions of management accounting:
i) Presentation of data:
Traditional profit and loss account and the balance sheet are not analytical for the
decision making.
ii) Aid of planning and forecasting: Management accounting is helpful to the
management in the process of planning through the techniques of budgetary
control and standard costing.
iii) Help in organizing: Organizing is concerned with establishment of relationship
among different individuals in the form. It included delegation of authority and
fixing responsibility.
iv) Decision making: Management accounting provides comparative data for
analysis and interpretation for effective decision making and policy formulation
v) Effective control: Standard costing and budgetary control and integral part of
management accounting. These techniques lay down targets; compare
performance, adherence to plans and progress of various sections of the
organization.
PART-C
1.What are the tools and techniques of management accounting
i) Financial policy and accounting: Every business concern has not plan for its
sources of funds. The fund can be raised out of different sources.Utlising a
particular source depends on cost of servicing the source, terms of repayment in
case of borrowings.
ii) Analysis of financial statement:
Analysis of financial statements is means to classify and present the data in a
manner useful to the management.
iii) Historical cost accounting:
Costs are recorded after being incurred for comparison with predetermined. The
actual are compared with budgets to reveal deviations and individuals responsible
for the same.
iv) Standard costing: Standard costing is an a important technique of cost control.
In standard costing the costs are determined in advance by systematic analysis.
v) Marginal costing: Under marginal costing, the cost of products is divided into
fixed and variable portions. While the variable costs are taken for decision making,
fixed costs are treated as period costs to be charged to costing profit and loss
account.
vi) Management Information system: An important function of management
accounting is reporting. This function has improved considerably with the
developing of electronic data processing data.
2. Difference between financial accounting and management accounting?
Financial Accounting
i)The purpose of financial accounting is to ascertain profit and loss by preparing
profit and loss and balance sheet
ii) Financial accounting records transactions as when they occur .
iii) Financial accounting is historical and ojective
iv) Financial accounting analyses data of the business as a whole
v) Financial accounting provides consolidated information of the whole enterprise
Management accounting
i) The purpose of management accounting is to provide information to the
management for decisions making on internal operations.
ii) management accounting is concerned with future plans and operations
iii) management accounting evaluates the performance of different
department, divisions and as per the requirement of the management
iv) the management accountant has flexibility in following different standards
set by the management
v) management accounting is of voluntary adoption y the management to
function effectively
vi) Prompt quick reporting is the main feature of management accounting
vii) management accounting does not have rigid principles
viii) the management accounting statements and reports are means for internal
purpose and they are not subject to audits
UNIT-II
PART-A
1. What are financial statements?
Financial statements refer to formal and original statements prepared by a business
concern to disclose its financial information. Financial statements prepared for the
purpose of presenting a periodical review or report on the progress by the management.
2. What is common size statement?
Common size statements indicate the relationship of various items with some common
items. Income statements, the sale figure is taken as basis and all other figures are
expressed as percentage of sales.
3. Explain the meaning of trend Analysis of financial statements.
Trend signifies a tendency and as such the review and appraisal of tendency in
accounting variables are nothing but trend analysis. Trend analysis is carried out by
calculating trend ratios (percentage) plotting the accounting data on graph or chart.
Trend analysis is significant for forecasting and budgeting.
PART-B
1.The following are the income statement of jeevan ltd, for the year ending 31st
December 1998 and 1999. you are required to prepare a comparative income statement
for the two years.
Particulars
31.121998
Rs
31.12.1999
Rs
Net sales
10,00,000
12,00,000
Cost of goods sold 5,50,000 6,05,000
Operating expenses:
Adminstration
Selling
80,000
60,000
1,00,000
80,000
Non-operating expenses:
Interest
Income-tax
40,000
50,000
50,000
80,000
solution:
Jeevan limited
Comparative Income statement
for the years ended 31st
December 1998 and 1999
1998
Rs
1999
Rs
Increase or decrease in 1998
and 1999
Amount
percentage
Rs %
Net sales 10,00,000 12,00,000 2,00,000 20
Less: cost of
goods sold
5,50,000 6,05,000 55000 10
Gross profit 4,50,000 5,95,000 1,45,000 32.22
Operating
expenses:
Adminstration
Selling
80,000
60,000
1,00,000
80,000
20000
20000
25
33.33
Total
Operating
expenses
1,40,000
1,80,000
40,000
28.57
Operating
profit
A-B
3,10,000
4,15,000
1,05,000
33.87
Non
operating
expenses:
Interest
Income tax
40,000
50,000
50,000
80,000
10000
30,000
25
60
Total non
operating
expense (D)
90,000
1,30,000
40,000
44.44
Net profit (C-
D)
2,20,000 2,85,000 65,000 29.55
PART-C
1. Dhandapani and co ltd furnishes the following balance sheet for the years 1997 and
1998.Prepare common size balance sheets.
Balance sheet
Liabilities 1997
Rs
1998
Rs
Assets 1997
Rs
1998
Rs
Share
capital
Reserves
10%
debentures
Creditors
Bills
payable
Tax payable
2,00,000
6,00,000
2,00,000
3,00,000
1,00,000
1,00,000
3,00,000
7,00,000
3,00,000
5,00,000
80,000
1,20,000
Buildings
Machinery
Stock
Debtors
Cash at
bank
4,00,000
6,00,000
2,00,000
2,00,000
1,00,000
4,00,000
10,00,000
3,00,000
2,50,000
50,000
15,00,000 20,00,000 15,00,000 20,00,000
solution:
Dhandapani & co ltd
Common size balance sheet as on 31st
December 1997 and 1998
Assets
1997
Amount %
1998
Amount %
Current Assets:
Cash at bank
Debtors
Stock
1,00,000
2,00,000
2,00,000
6.67
13.33
13.33
50,000
2,50,000
3,00,000
2.50
12.50
15.00
Total current Assets
(A)
5,00,000
33.33
6,00,000
30.00
Fixed Assets:
Buildings
Machinery
4,00,000
6,00,000
26.67
40.00
4,00,000
10,00,000
20.00
50.00
Total fixed Assets 10,00,000 66.67 14,00,000 70.00
Total Assets (A+B) 15,00,000 100.00 20,00,000 100.00
Liabilities and capital:
Creditors
Bills payable
Tax payable
3,00,000
1,00,000
1,00,000
20.00
6.67
6.66
5,00,000
80,000
1,20,000
25.00
4.00
6.00
Total current
liabilities(A)
5,00,000 33.33 7,00,000 35.00
Long term liabilities:
10% Debentures
2,00,000
13.33
3,00,000
15.00
Total liabilities A+B=C 7,00,000 46.67 10,00,000 50.00
Capital & Reserves:
Share capital
Reserves
2,00,000
6,00,000
13.33
40.00
3,00,000
7,00,000
15.00
35.00
Total share holders’
funds (D)
8,00,000
53.33
10,00,000
50.00
Total Liabilities and
capital (C+D)
15,00,000
100.00
20,00,000
100.00
UNIT –III
PART-A
1.What is Ratio?
Ratio can be defined as “ Relationship expressed in quantitative terms, between figures
which have cause and effect relationship or which are connected with each other in
some manner or the other”
2.What is Ratio Analysis?
Ratio analysis is an age old technique of financial analysis. “ the process of determining
and presenting the relationship of items and groups of items in the financial statements”
3. Explain the meaning, of R.O.I.
This is called “Return on Investment. It measures the sufficiency or otherwise of profit in
relation to capital employed.
4. What are the steps involved in Ratio Analysis?
i) Selection of relevant information
ii)Comparison of calculated Ratios
iii) Interpretation and Reporting
5. What are the modes of expressing ratios?
i) In proportions
ii) In Rate or time or coefficient
iii) In percentage.
PART-B
1. Calculate stock turnover ratio and stock turnover period form the following.
sales Rs.10,00,000, gross profit ratio 20% stock at the beginning of the year Rs.1,75,000,
stock at the end of the year Rs.1,45,000.
solution:
Cost of sales
stock turn over ratio = ---------------------
Average stock
Cost of sales = Sales – Gross profit
1,00,000- (1,00,000*20%)
= 10,00,000-2,00,000 = Rs.8,00,000
Average stock = Opening stock + closing stock
__________________________
2
1,75,000+1,45,000
= ___________________
2
= Rs 1, 60,000
8,00,000
Stock turnover ratio =__________ = 5 times
1, 60,000
Days / months in the year
Stock turnover period:______________________________
stock turnover ratio
Stock turnover period in days =365/5 = 73 days
Stock turnover period in months= 12/5 = 2.4 months
2. You are given the following information:
Cash 18,000
Debtors 1,42,000
Closing stock 1,80,000
Bills payable 27,000
Creditors 50,000
Outstanding exp 15,000
Tax payable 75,000
calculate (a) current ratio (b) Liquidity ratio (c) Absolute liquidity ratio.
solution:
Current assets
(a) current ratio= _______________
Current liabilities
current assets: Current liabilities:
cash 18000 Bills payable 27,000
Debtors 1,42,000 Creditors 50,000
Clsoing stock 1,80,000 Outstanding expenses 15,000
Tax payable 75,000
total= 3,40,000 total = 1, 67,000
3,40,000
current ratio= __________ = 2.036 times
1,67,000
liquid assets
b) Liquid ratio= _______________
current liabilities
liquid assets = current assets-stock and prepaid expenses
= 3,40,000-1,80,000 = 1,60,000
= 1,60,000/1,67,000 = 0.96
c)Absolute liquidity ratio = cash and bank balance+ Marketable securities
________________________________________
current liabilities
=18,000
------------- = 0.11
1,67,000
PART –C
1.Prepare a Balance sheet with as many details as possible from the following
information.
Gross profit ratio 20%
Debtors turnover 6 times
Fixed assets to net worth 0.80
Reserves to capital 0.50
current ratio 2.50
Liquid ratio 1.50
Net working capital Rs. 3,00,000
Stock turnover ratio 6 times
solution:
Liabilities RS Assets RS RS
Capital 10,00,000
Reserves and surplus
5,00,000
Current liabilties
15,00,000
2,00,000
Fixed assets
Current assets:
Closing stock
Debtors
Liquid assets
2,00,000
2,50,000
50,000
12,00,000
5,00,000
17,00,000 17,00,000
i) Current ratio given = 2.50
current assets
current ratio=______________
current liabilities
working capital = current assets- current liabilities
= 2.5-1 =1.5
current assets = 3,00,000*2.5/1.5 = Rs.5,00,000
Current liabilities = 3,00,000*1/1.5 = Rs 2,00,000
ii) Calculation of liquid assets and stock
liauid ratio given = 1.50
liquid assets
Liquid ratio= _______________
current liabilities
liquid assets
1.5 = _______________
2,00,000
liquid assets = 2,00,000*1.5 = Rs.3,00,000
liquid assets = current assets-stock
3,00,000 = 5,00,000-stock
stock = 5,00,000-3,00,000
= Rs. 2,00,000
iii) Calculation of Debtors
Stock turnover ratio given = 6 times
Cost of goods sold
stock turnover ratio ________________
Average stock
cost of good sold
6 = _________________
2,00,000
cost of goods sold = 2,00,000*6
= Rs . 12,00,000
Gross profit ratio given 20%
when sales=100 gross profit=20 cost of good sold = 80
sales = cost of goods sold = 100/80
= 12,00,000* 100/80 = Rs 15,00,000
Debtors turnover = Credit sales/ Average receivables
6 = 15,00,000/Average receivables
Average receivables = 15,00,000/6
= 2,50,000
iv) other liquid assets
liquid assets 3,00,000
less: Debtors 2,50,000
other liquid assets = 50,000
v) Calculation of fixed assets and net worth
Fixed assets to net worth given 0.80
Assuming there are no long tem debt and fictitious assets
Balance sheet equation= net worth+ current liabilities = fixed assets +current
assets
Assuming net worth as x
x+ 2,00,000 = 8x+5,00,000
x-8x = 5,00,000-2,00,000 2x= 3,00,000
x= 3,00,000/2 Rs = 15,00,000
Net worth = 15,00,000
Fixed assets = 15,00,000*.8 = 12,00,000
vi) Calculation of capital and reserves
Reserves to capital given = 0.50
Net worth = 0.50+1= 1.5
Net worth = 1.5 = 15,00,000
capital = 15,00,000* 1/1.5 =Rs 10,00,000
Reserves = 15,00,000* 0.5/1.5 = Rs 5,00,000
